Countless Americans have been devastated by the COVID-19 pandemic and its resulting lockdowns by individual states – some of which remain shut today. Many individuals were forced to shutter businesses they spent decades building or saw a significant reduction in income and the ability to meet financial obligations, including the payment of taxes. In response to the unexpected economic hardship, the IRS initially implemented the People First Initiative (“PFI”) which, in part, temporarily suspended most of its collection activities. The PFI ended July 2020, and the IRS renewed its collection practices. A new Taxpayer Relief Initiative (“TRI”) replaced the PFI, but provides much more modest benefits to taxpayers in the collection process.
It is still possible for individuals and businesses to defend IRS collection activities, before or after a tax lien has been filed, and save a considerable sum or pay over an extended period of time. The first step is understanding your rights and the alternative defenses available, and the modified relief implemented by the TRI.
The IRS must follow specific procedures during the collection process, beginning with an established time frame for mailing notices. These procedures are designed to afford taxpayers sufficient time to pay taxes before the IRS files a lien, although the IRS is significantly more aggressive in collecting employment and payroll taxes from businesses. It is important not to ignore the notices when they arrive.
The statutory period within which the IRS can collect delinquent taxes is ten years from the date they are assessed. Penalties and interest accrue during the collection process until the taxes are paid in full. A Notice of Tax Due and Demand for Payment is mailed once the IRS determines that taxes are delinquent. If delinquent taxes remain unpaid after several other notices, the IRS will issue a Final Notice, Notice of Intent to Levy.
At this time, the IRS typically files the tax lien that was previously established, making a legal claim to property as security for the payment of taxes. If no action is taken by the taxpayer, the IRS will enforce its lien by levying (seizing) the taxpayers wages, bank accounts, commissions, and other property until the tax debt is paid in full. If a business fails to pay employment taxes after demand, the IRS can seek recovery of the taxes from the “responsible person(s)” (the individual(s) responsible for withholding and submitting taxes for the business).
After the IRS has demanded full payment in its initial notice, or at any time up to and including the filing of a tax lien or notice of levy, the taxpayer can either voluntarily comply by making payment, or seek alternative payment arrangements. There are four primary arrangements available:
- Apply for an extension of time to pay with a short-term payment plan. Typically, the taxes would have to be paid within 120 days. Under the TRI, the timeframe has been extended to 180 days. Interest and late payment penalties will accrue.
- Request “currently not collectible” (“CNC”) status. A hardship consideration for taxpayers with insufficient funds to pay the tax debt. If accepted, the IRS will temporarily cease collection efforts. The account will remain in CNC status until the taxpayer is financially able to make monthly payments, but penalties and interest will continue to accrue. IRS will review at least annually to determine if a taxpayer is able to start making payments.
- Establish a partial or full payment installment agreement (“IA”). This allows taxpayers to make full payment of delinquent taxes in smaller, more manageable payments, over more than 180 days. There is a streamlined process for taxpayers owing less than $50,000. Under the TRI, taxpayers owing $50,000-$250,000 will not have to complete a lengthy financial statement if taxes are paid within 10-year statue of limitations. The IRS will not levy against the taxpayer’s property while an IA is being considered or is in effect.
- Make an Offer in Compromise (“OIC”). Perhaps the most advantageous arrangement, the IRS may accept a proposal to settle unpaid taxes for less than the full amount of the balance due. The IRS generally accepts an OIC when it is unlikely the tax liability can be collected in full and the amount offered equals at least the amount the IRS calculates it can collect based on the taxpayer’s equity in assets and disposable monthly income.
In addition to these alternative payment arrangements, penalties and interest can also be abated (waived) by the IRS under certain circumstances. For an abatement of penalties, the taxpayer must show a “reasonable cause” existed that prevented payment of taxes (i.e., death or illness in the family, civil disturbance, drug/alcohol/psychological problems, divorce). To abate interest, however, there has to be an IRS error (i.e., loss of paperwork) or delay (i.e., delay in processing) in a managerial or ministerial task. The taxpayer could not have caused any significant impact upon the error or delay.
A taxpayer should pay delinquent taxes as soon as practical given the levy power of the IRS and accrual of penalties and interest, but that is not always possible. In such cases, the taxpayer should consider his/her rights and available settlement options in choosing the appropriate course of action.